You are the number one free agent in the National Hackey-Sack League. You get of

Question

You are the number one free agent in the National Hackey-Sack League. You get offered three different 5-year contracts, denoted A, B, and C below. Assuming you can earn 12% per year on your investments, which contract should you take? Contract A: You are offered $100,000 today, $200,000 in one year, and a final payment of $200,000 in five years. Contract B: You will get $200,000 today, $200,000 in three years, and a final payment of $100,000 in five years. Contract C: You will get $100,000 each of the next five years.

Explanation / Answer

A:

Present value = 392,056.80

B:

PV of B = 399,098.74

C:

PV of C = 360,477.62

so choose B

Discount rate 12.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow          100,000.000 0                           100,000.00                       100,000.00          200,000.000 1                           178,571.43                       278,571.43                              -   2                                            -                         278,571.43                              -   3                                            -                         278,571.43                              -   4                                            -                         278,571.43          200,000.000 5                           113,485.37                       392,056.80

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